Federal health care reform: Special treatment gets special punishment

The Patient Protection and Affordable Care Act (i.e., federal health care reform) generally prohibits fully insured group health plans from discriminating in favor of highly compensated individuals, effective for plan years beginning on or after Sept. 23, 2010.Certain types of health plans are exempt from this rule, such as plans that cover only former employees (such as retiree medical plans), and stand-alone plans that provide only dental, vision, accident and disability, long-term care, specific disease, hospital or fixed indemnity, and Medicare supplemental coverages. Similar nondiscrimination rules have long applied to self-insured medical plans under the Internal Revenue Code. In fact, many employers have used fully insured coverage to avoid the discrimination prohibition on self-insured plans but must now reconsider these benefits. For example, companies sometimes agree in an employment agreement to continue company-paid medical insurance coverage for a period of time after an executive's employment. It is unlikely that the company intends to provide this type of benefit to all employees.This type of disparate treatment could violate the rules.Employers have a few options: (1) don't provide the coverage; (2) provide the coverage to all employees; or (3) agree to provide with a caveat. The caveat would be to give the employer the option not to provide the subsidized medical coverage if the employer would incur an additional penalty or tax for doing so. Instead, the employer might agree to pay additional, taxable cash severance payments to the executive.How costly is it to violate these nondiscrimination rules? An employer with a health plan that violates the nondiscrimination rule applicable to insured plans is subject to an excise tax of $100 for each day during which the plan is discriminatory multiplied by each individual discriminated against. In other words, if an employer has 75 employees and provides fully insured group coverage to five executives but no coverage to the other employees, the employer is subject to a tax of $7,000 (70 x $100) for each day the employer provides the discriminatory benefit.The excise tax does not apply to a fully insured group health plan of a small employer (generally defined as having 50 or fewer employees) if the failure is “solely” due to the coverage offered by the health insurer. This may provide relief for some small employers, but the facts will need to fit the exception. Employees have remedies as well. A participant could also bring a lawsuit seeking to force the plan to provide the discriminatory benefits to all employees.The federal government has indicated it will not enforce these rules until it issues further guidance with details on how employers can comply. For a while, employers have some relief. However, care must be taken now to avoid contractual obligations that will result in hefty penalties later when these rules are enforced.Before you give to some, be prepared to give to all or give to none.

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